Friday, March 6, 2009

I highly recommend this article in today's WSJ by Michael J. Boskin, which explains how and why Obama's policies are likely to create serious problems for our economy in the years to come. If you want to be an informed critic of Obama's policies, this article is a must-read. Excerpts:

The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.

Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society.

To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.

The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy.

Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. He's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.

Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates.

As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse.

The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top.

A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents.

The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion.

New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.

From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.

Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.

10 comments:

That sums it up nicely. It does not make economic sense to engage in radical economic reformation during a crisis unless the reformation assists the current situation. Only after stability and growth return, can you tackle the greater issues of income disparity, healthcare and energy.

Scott. Did you see this piece about part time workers from the calculated risk blog? The number of forced part time workers, adjusting for population size, is heading towards records.

Bernard: the part time worker statistic doesn't look too scary. Adjusted for population growth, it is not yet as bad as in the '81-82 recession. And at least they are working. Real incomes have risen in the past year, so that is encouraging as well.

Cabodog: Not sure exactly what Brian is referring to, but it could be the household survey of those working adjusted to bring it into line with the establishment survey (the two surveys are supposed to measure the same thing, but they traditionally report different levels of employment. I note that the unadjusted household survey showed a decline of 373,000 jobs, versus the -651,000 in the establishment survey. So there are hints in the data that things might not be quite so bad as the headline number suggested.

Even the moost diehard supply siders (Bruce Bartlett for example) would call this needless alarmism. In static terms, an increase in the top marginal income tax rate from 35% to 39.6% would increase revenues by 13.1% and reduce after tax income by 7.3%. Similarly, the increase in capital gains tax rates from 15% to 20% will increase revenues by 33.3% but reduce after tax income by 6.7%. Anyone who has even the smallest amount of common sense knows that this argument will not hold water.

I think a one-third rise in the capital gains tax is a BIG DEAL. I think it is already causing people to sell. It reduces the present after tax value of future stock returns by a signficant fraction. It reduces, on the margin, people's willingess to take risk. It increases on the margin the hurdle rate for just about all investments.

Top marginal rates will rise, and in addition to that the value of allowed deductions will fall. The combination equates to a meaningful increase in taxes on the margin. It will result in less work and less investment. How can we afford that in these trying times?

You've got to come down out of your ivory tower one of these days and experience what it feels like to have the government take a gigantic and growing share of your income.

Living in California, with an investment income stream that puts me now too far from being "rich," if I were to decide to take on a part time job my marginal tax rate would be about 65%. (35% federal, 10% state, 15% FICA, and the loss of deductions). And it would go up if Obama has his way. That's just about enough for me to say "forget it, I'm not going to work if I have to give the government more than two thirds of what I make." Would you?

Scott,A 6.7% decrease in after tax capital gains tax income is a big deal to you? Seems a little odd to me.

Well, if I were you, then I wouldn't work (that's your choice). I suspect that a lot of people will still choose to. This is especially true since so many of them are overleveraged. (Personally, I don't have to work, but I do choose to because I enjoy the excercise.)

Mark, for all his studies, is a classic example of someone who doesn't possess a simple grasp of human nature, let alone how markets work. All the econ degrees in the world don't amount to much if you can't figure out basic laws of supply and demand, marginal rates of taxation, and the like.

The big question for me about Obama's radical agenda is whether he's deliberately trying to wreck the economy to grow government substantially -- sort of a Reagan Revolution in reverse -- or whether he and his top advisors are merely economically illiterate while at the same time trying to cement their majorities by buying votes from the underclass.

At this stage I think it's more of the latter: they honestly don't think, like Mark here, that ever-growing large tax burdens coupled with unprecedented huge spending is an issue. Exploding deficits, interest on the debt, stock market tanking -- that's only a worry when Republicans rule the roost. And it's good politics from their point of view.

Mark Sadowski, like most liberals I read or talk to, find in necessary to salt their comments with judgmental innuendo. Instead of just make their claim they have to first tell us how we should be feeling, there by making any counter argument moot. "Even the most diehard" and "A 6.7% decrease in after tax capital gains tax income is a big deal to you? Seems a little odd to me". I can tell you that after the drubbing my retirement assets have taken, 6.7% is a big deal to me. This way of debating is the current liberals genius and has decimated the free flow of debate within this country. It is the purview of political correctness.

Mr. Sadowsky even admits to his success, so why should he care how it affects others, so long as the role of government is expanded.

From the Boskin article:

"New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government."

It has become my view more and more that this is the essence of the current democratic party's philosophy. Expand and entrench government and governmental largess to a saturation point where a majority of the population is dependent upon it and thereby secure their own posterity. Even at the expense of the nations wealth, power, and place in history.

Bob, well said. De Tocqueville warned about this, how majorities can maintain their rule in a democracy by buying off large segments of voters. And this is exactly what the Obamamaniacs are attempting here. In their view, the more the private sector is seen as failing, the more the public sector can expand, thereby cementing their majorities.

But this, of course, is a short-term approach, whether they realize it or not, b/c eventually in their kind of economy the rich get less rich, revenues dry up, government programs get cut, and (hopefully) long before this end point the people wise up and vote out the eloquent geniuses who know so much better how to run a global economy than free markets.